Euro May Face Headwinds Near Eight-Month High

The euro hit an eight-month high against the U.S. dollar this week but may face resistance in the near term, perhaps prompted by a few choice words from the European Central Bank on Wednesday.

The euro rose Tuesday to $1.3589, its highest since Feb. 6, as the dollar fell broadly against major currencies following the first shutdown of the U.S. federal government in 17 years.

On a trade-weighted basis–a comparison of the euro’s exchange rate against those of the bloc’s major trading partners–the currency is above where it traded on Feb. 6.

The euro logo is seen in front of the European Central Bank building.

Agence France-Presse/Getty Images

Traders will be eager to see if the ECB, in announcing its interest-rate decision on Wednesday, refers to the euro’s recent strength.

In a note to clients, analysts at BNP Paribas said the ECB would have to consider the euro’s gains since the central bank’s last policy meeting in September, and the impact on inflation. Any indication from the bank that it is unhappy with the euro’s strength would weigh on the currency, they said.

ECB President Mario Draghi said in February that the euro’s rise may damp inflation pressures. This would enable the central bank to keep rates low in support of the economy, but the deflation-wary ECB also wants inflation closer to 2% than the 1.1% reported last month.

The ECB’s primary mandate is to keep annual inflation just under 2% over the medium term.

The bank is widely expected to leave the benchmark rate unchanged at 0.5%, an all-time low, to sustain the bloc’s nascent economic recovery.

Mr. Draghi had said last week that, given the bloc’s fragile economic recovery, the central bank is willing to consider additional stimulus measures to keep short-term market interest rates in check.

Italian politics may also put pressure on the euro in coming weeks, after former Prime Minister Silvio Berlusconi’s center-right Forma Italia party on Saturday withdrew its five ministers from the governing coalition, plunging the country into political chaos.

Prime Minister Enrico Letta has called for a confidence vote on Wednesday to try to hold his five-month old coalition government together.

Technical analysis using Japanese candlesticks, a popular tool, also points to declines ahead for the euro. The euro/dollar spot rate completed a bearish shooting-star pattern on its daily price chart after it hit the 1.3589 high on Tuesday. This pattern is widely recognized as indicating a reversal.

If it starts falling, the euro may not find any significant support until 1.3100, the base set on Sept. 6.

The euro was quoted at $1.3525 at 1018 GMT in European trading Wednesday.